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Racial tensions increased dramatically within a year. They were fuelled by the Barisan Sosialis's tactics of stirring up communal sentiment as the pro-Communist party sought to use means to survive against the crackdown by both the government of Singapore and the Federal Government. In particular, despite the Malaysian government conceding citizenship to the many Chinese immigrants after independence, in Singapore the Chinese disdained the Federal policies of affirmative action, which granted special privileges to the Malays guaranteed under Article 153 of the Constitution of Malaysia. These included financial and economic benefits that were preferentially given to Malays and the recognition of Islam as the sole official religion, although non-Muslims maintained freedom of worship.

Malays and Muslims in Singapore were being increasingly incited by the Federal Government's accusations that the PAP was mistreating the Malays. Numerous racial riots resulted, and curfews were frequently imposed to restore order. The external political situation was also tense at the time, with Indonesia actively against the establishment of the Federation of Malaysia. PresidentSukarno of Indonesia declared a state of Konfrontasi (Confrontation) against Malaysia and initiated military and other actions against the new nation, including the bombing of MacDonald House in Singapore in March 1965 by Indonesian commandos which killed three people.[3] Indonesia also conducted seditious activities to provoke the Malays against the Chinese.[4] One of the more notorious riots was the 1964 race riots that took place on Prophet Muhammad's birthday on 21 July, near Kallang Gasworks; twenty-three were killed and hundreds injured. More riots broke out in September 1964. The price of food skyrocketed when the transport system was disrupted during this period of unrest, causing further hardship. The Singapore Government later named 21 July each year as Racial Harmony Day.

The Federal Government of Malaysia, dominated by the United Malays National Organisation (UMNO), was concerned that as long as Singapore remained in the Federation, the bumiputera policy of affirmative action for Malays and the indigenous population would be undermined and therefore run counter to its agenda of addressing economic disparities between racial groups. One of the major concerns was that the PAP continued to ignore these disparities in their repeated pledges for a "Malaysian Malaysia" – the equal treatment of all races in Malaysia by the government which should serve Malaysian citizens without any regard for the economic conditions of any particular race. Another contributor was the fear that the economic dominance of Singapore's port would inevitably shift political power away from Kuala Lumpur in time, should Singapore remain in the Federation.

The state and federal governments also had disagreements on the economic front. Despite an earlier agreement to establish a common market, Singapore continued to face restrictions when trading with the rest of Malaysia. In retaliation, Singapore did not extend to Sabah and Sarawak the full extent of the loans agreed to for economic development of the two eastern states. The situation escalated to such an intensity that talks soon broke down and abusive speeches and writing became rife on both sides. UMNO extremists called for the arrest of Lee Kuan Yew.

On 7 August 1965, Prime Minister Tunku Abdul Rahman, seeing no alternative to avoid further bloodshed, advised the Parliament of Malaysia that it should vote to expel Singapore from Malaysia.[2] Despite last-ditch attempts by PAP leaders, including Lee Kuan Yew, to keep Singapore as a state in the union, the Parliament on 9 August 1965 voted 126–0 in favor of the expulsion of Singapore, with Members of Parliament from Singapore not present. On that day, a tearful Lee announced that Singapore was a sovereign, independent nation and assumed the role of Prime Minister of the new nation. His speech included this quote: "For me it is a moment of anguish because all my life….you see the whole of my adult life…. I have believed in merger and the unity of these two territories. You know it's a people connected by geography, economics, and ties of kinship... ."[5]